Professional Documents
Culture Documents
United States Court of Appeals, First Circuit
United States Court of Appeals, First Circuit
2d 9
3 UCC Rep.Serv.2d 1665
In mid-May, 1979, Traill telephoned Reid and informed him that Depositors
would not grant him any further advances under the March agreement. Reid
had thought at the time that this halt of further advances might only be
temporary. Defendant claimed that Traill sent Reid a follow-up letter on May
18, 1979, stating that Depositors would no longer honor overdrafts on Reid's
accounts and suggesting that Reid restructure his debts with another lender.
Reid denied receiving the letter and alleged that it was never, in fact, sent to
him.
On May 29, 1979, Nickerson & O'Day sent a check to Depositors as payment
for Reid's work at the Bucksport Housing Project. The check was for
$6,507.90. It was made out to Depositors and to Pro Paint pursuant to an
agreement between Depositors and Reid whereby Reid assigned his accounts
receivable to Depositors as security for the March loan. Depositors credited
$2,500 to the account of Pro Paint and applied the remaining $4,007.90 to
offset part of the outstanding balance on Reid's March loan. Reid claimed that
Depositors undertook this action without his authorization.
in Reid's imagination.
7
On September 20, 1979, Reid received a past-due notice on the March loan.
The notice requested payment of $694.84 in interest and stated that the payment
had been due on September 5, 1979. Reid testified that this was the first notice
he had received concerning the March loan.
Reid's business collapsed and he lost his four vehicles and his home. On
November 7, 1979, Reid filed a Chapter 13 bankruptcy proceeding which was
converted to a Chapter 11 proceeding in January, 1980. Mrs. Reid suffered
emotional problems and drug dependency. The couple separated for a period of
a year and a half.
10
The Reids, who are black, claimed that Depositors acted in bad faith to limit
and then terminate their credit. They also claimed that Depositors' actions were
motivated by racial prejudice. Defendant claimed that Depositors acted in good
faith to secure its financial interests when it learned of Reid's personal
difficulties and mismanagement of his business; it denied that its actions were
racially motivated.
11
At trial, the district court directed a verdict for defendant on plaintiffs' claims
for violations of the Fair Credit Reporting Act and for breach of fiduciary
duties. Plaintiffs withdrew their claims for interference with contractual
relations and wrongful dishonoring of checks. The jury found for defendant on
plaintiffs' claims for violation of the express terms of the credit agreement,
racial discrimination, two counts for infliction of emotional distress, and failure
to comply with Article 9 of the Uniform Commercial Code. The jury found for
plaintiffs on their pendent state claim for breach of the March loan agreement
based on violation of an implied covenant of good faith and fair dealing. It
awarded plaintiffs $100,000 in compensatory and $500,000 in exemplary
damages; the exemplary damages award was struck by the court. Both parties
have appealed. In Part II, we address defendant's arguments on appeal; in Parts
III-VI we address those of plaintiffs.
Plaintiffs' recovery in contract was based on the theory that when Depositors, in
May 1979, and thereafter, shut off Reid's credit and took steps to realize upon
its collateral, it violated an implied covenant of good faith contained in the
March loan agreement between plaintiffs and Depositors. The district court
took as self-evident the proposition that Maine contract law required good faith
performance. See generally Burton, Breach of Contract and the Common Law
Duty to Perform in Good Faith, 94 Harv.L.Rev. 369 (1980). The Uniform
Commercial Code, as adopted by Maine, states: "Every contract or duty within
this Title imposes an obligation of good faith in its performance or
enforcement." 4 Me.Rev.Stat.Ann. tit. 11, Sec. 1-203 (1964). That this
obligation carries with it a cause of action seems clear from another provision
of the Code: "Any right or obligation declared by this Title is enforceable by
action unless the provision declaring it specifies a different and limited effect."
Id. at Sec. 1-106(2). See also Restatement (Second) of Contracts Sec. 205
(1979).
15
We interpret the Maine cases making reference to the general duty of good faith
in light of this general acceptance of the principle. The Maine Supreme Judicial
Court has explicitly recognized the U.C.C.'s "broad requirements of good faith,
commercial reasonableness and fair dealing." Schiavi Mobile Homes, Inc. v.
Gironda, 463 A.2d 722, 724-25 (Me.1983) (citing U.C.C. Secs. 1-203, 2-103 &
1-106, Comment 1). In addition, some aspects of the present case concern the
handling of Reid's bank accounts with Depositors and would thus be governed
by the standard of "good faith" and "ordinary care" under section 4-103 of the
U.C.C. See C-K Enterprises v. Depositors Trust Co., 438 A.2d 262, 265
(Me.1981).
16
In Linscott v. State Farm Mutual Auto Ins. Co., 368 A.2d 1161 (Me.1977), the
court discussed whether a duty of good faith existed between an insurer and a
third-party tort claimant. The court stated that, while such a duty is "implicit" in
the contract between an insurer and its insured, the essentially "adversary"
relationship between an insurer and a third-party claimant precludes the finding
of such an implicit duty in their dealings. Defendant would have us view the
court's finding of a good faith duty between the insurer and the insured as
exceptional; under defendant's interpretation, an "adversary" relationship,
whether contractual or not, would have no good faith requirement.
17
Defendant next argues that a cause of action based on the duty is not generally
accepted, even if the principle of good faith performance has been widely
acknowledged. Defendant cites several cases finding no such cause of action in
their jurisdictions. See, e.g., Management Assistance, Inc. v. Computer
Dimensions, Inc., 546 F.Supp. 666 (N.D.Ga.1982), aff'd, 747 F.2d 708 (11th
Cir.1984). These cases generally cite as their authority Chandler v. Hunter, 340
So.2d 818, 821 (Ala.App.1976), for the proposition that no jurisdiction has
been found that allows such a cause of action.
19
We reject the applicability of Chandler and the cases based on it for two
reasons. First, a determination that no such cause of action exists would conflict
with the clear meaning of section 1-203 of the U.C.C., particularly when read in
conjunction with section 1-106(2). We assume that the Maine courts would
adhere to the plain language of these provisions, as well as to generally
accepted modern contract principles. Secondly, the fact that numerous
jurisdictions have allowed recovery on theories of breach of good faith refutes
the empirical assumption upon which Chandler appears to have been based.
See, e.g., K.M.C. Co. v. Irving Trust Co., 757 F.2d 752 (6th Cir.1985) (suit
under New York law by borrower against lender for arbitrary termination of
credit); Power Motive Corp. v. Mannesmann Demag Corp., 617 F.Supp. 1048
(D.Colo.1985) (Ohio law); Fortune v. National Cash Register Co., 373 Mass.
96, 364 N.E.2d 1251 (1977) (Massachusetts law). See also Atlas Truck
Leasing, Inc. v. First NH Banks, Inc., 808 F.2d 902 (1st Cir.1987) (interpreting
New Hampshire law).1
Defendant argues that the "demand" provision of the note establishing the
credit agreement precludes a good faith requirement in this case, even if such a
requirement is recognized in general. Defendant contends that this exception to
the general good faith requirement is mandated by section 1-208 of the U.C.C.,
as interpreted by the U.C.C. Comment to the section. Section 1-208 states:
21
A term providing that one party or his successor in interest may accelerate
21
22
23
We turn, therefore, to the documents establishing the loan to see whether they
clearly gave Depositors the right to demand payment or terminate the
relationship on demand and without cause. The "Secured Interest Note," dated
March 2, 1979, states in its opening paragraph:
24 Demand, after date, for value received, [Paul Reid d/b/a Pro Paint & Decorating]
On
... promise[s] to pay to the order of [Depositors] ... Twenty-five Thousand and
no/100 DOLLARS with interest at 13.75 per cent per annum payable quarterly.
25
26
27
Defendant challenges the district court's formulation of the test of "good faith"
in its instruction to the jury. Defendant claims that the judge instructed the jury
that the test for good faith comprises both an objective and a subjective
component. Defendant argues that under Maine law an objective standard, such
as a "reasonable man" test, may only be applied in cases involving the sales of
goods that fall under Article 2 of the U.C.C. Otherwise, defendant claims, any
consideration of "good faith" should be limited to its subjective definition in
section 1-201(19) as "honesty in fact."
29
30
The jury later requested that the judge clarify these instructions. In his new
instructions, the judge clearly formulated a subjective standard for good faith:
31
32
One acts with good faith, in general, when one acts honestly.
33
Good faith means that one acts without any improper motivation. One acts with
the truth and not for some ulterior motive that is unconnected with the
substance of the agreement in question when one is acting with good faith.
34
35
We find, therefore, that the judge ultimately instructed the jury to decide the
issue of good faith under the subjective standard. "Honesty in fact" is required
under all interpretations of the duty of good faith under section 1-203. Thus,
even if we agreed with defendant that the Maine courts would limit an
objective standard for good faith to Article 2 cases, we would not find a fatal
error in the judge's instructions here.2
D. Sufficiency of Evidence
36
37
We think the jury could have reasonably inferred that Depositors' actions were
not taken in good faith. The March, 1979, credit agreement represented the
largest amount of credit extended to Reid by the bank, and could be seen as the
culmination of an ongoing and mutually beneficial relationship. The jury could
have found that by mid-May, when Reid's line of credit was abruptly shut off,
he was not in default and his overall position had not changed that significantly,
especially as the bank did not first register complaints to him or ask him to alter
his conduct in some manner. The bank's president testified that it was
customary before cutting off a customer's line of credit to send notices in
advance and call the customer to the bank for discussion. This was not done as
to Reid, nor was any convincing reason advanced by the bank for not doing so.
(The bank, indeed, did not even call as a witness the officer who had dealt
directly with Reid and could have best explained why the bank acted as it did.)
The jury could have found that in restricting Reid's credit when and as it did the
bank was motivated by ulterior considerations, not a good faith concern for its
financial security. The jury could have found that the bank decided in bad faith
and without notice to terminate the credit relationship as a whole. The jury
might have viewed the bank's actions to restrict and terminate Reid's credit to be
in bad faith in part because they were taken only a short time after the bank had
shown confidence in Reid and had given him grounds to rely on the
continuation of the relationship. The jury might have inferred bad faith from
these actions of the bank, even if it did not believe that racial prejudice was the
effective factor that motivated the bank's bad faith. In sum, the jury could have
reasonably found that the bank acted in bad faith in precipitously and without
warning halting further advances on which it knew Reid's business depended, in
failing to make a sufficient effort to negotiate alternative solutions to any
problems it perceived in its relationship with Reid, and in failing to give notice
that it intended to terminate the relationship entirely. The evidence concerning
these and other aspects of Depositors' actions provided a sufficient basis for a
jury finding that the bank's actions were not taken in good faith.
III. EXEMPLARY DAMAGES
38
The jury awarded plaintiffs $500,000 in exemplary damages. This award clearly
related to the finding of a breach of the implied covenant of good faith because
the jury found for defendant on all other counts. The district judge struck the
exemplary damages award, stating that he had specifically charged the jury that
exemplary damages could not be awarded on a contract claim in Maine.
39
Plaintiffs contest the district court's finding that it had not submitted to the jury
the issue of exemplary damages on the contract claim. Our examination of the
record supports the district court's finding. There is no merit in plaintiffs'
procedural argument. Plaintiffs also argue that exemplary damages are
available in Maine in exceptional circumstances.
40
Under Maine law, "[a]s a general rule, exemplary damages are not recoverable
for a breach of contract." Forbes v. Wells Beach Casino, Inc., 409 A.2d 646,
655 (Me.1979). Plaintiffs argue that this "general rule" admits of an exception
when the breach amounts to an independent, recoverable tort. This view of the
general state of the doctrine of exemplary damages is not without merit. See,
e.g., In re Blier Cedar Co., 7 B.R. 195, 196 (D.Me.1980) (interpreting Maine
law as containing the "tort" exception).3
41
We need not, however, reach this legal question here because there are no
recoverable torts to which the exemplary damages could attach. The jury found
for defendant on the conversion count, plaintiffs withdrew their claim for
intentional interference with contractual relations and wrongful dishonoring of
checks, and the court directed a verdict for defendant on the count for breach of
fiduciary duties. Even if we were to accept plaintiffs' legal argument, therefore,
we would not find exemplary damages appropriate in this case.
The district court directed a verdict for defendant on plaintiffs' claim for breach
of fiduciary duties. The district court's holding may be divided into factual and
legal components. The court found that "under the facts of this case, no
showing is made of a fiduciary or [what is] sometimes referred to under Maine
law as a confidential relationship."4 The court went on to state that, in the
debtor/creditor context, a finding of a confidential relation is excluded in
principle; to hold otherwise, the court declared, would disrupt "a whole system
of credit that exists in the economic marketplace in this country."
43
While there are no Maine cases directly on point, we have reservations about
the sweeping legal rule announced by the district court. A review of cases from
other jurisdictions shows that courts are split on the issue of whether, and in
what circumstances, a confidential relation may be implied between a bank and
its depositors or loan customers. Some courts agree with the district court in
stating flatly that no such relation exists. See, e.g., Centerre Bank of Kansas
City v. Distributors, Inc., 705 S.W.2d 42 (Mo.App.1985). Other courts,
however, hold that such a relation may arise when a customer "reposes trust in a
bank and relies on the bank for financial advice, or in other special
circumstances." Baylor v. Jordan, 445 So.2d 254, 256 (Ala.1984). In those
jurisdictions holding the second view, the existence of a confidential relation is
generally determined as a matter of fact; the extent of the factual showing
required varies according to jurisdiction. This second view, we note, appears to
be that of the majority of courts that have reached this issue.5
44
Statements in Maine cases suggest that the Maine courts, were they presented
with the question, might agree with the majority view that such relations cannot
be excluded per se from the context of banks and their depositors or loan
customers. In Maine,
45 "fiduciary or confidential relation" concept when used in connection with
the
improper influence affecting the validity of some transaction [is] one of broad
application and ... it embrace[s] not only technical fiduciary relations ... but may also
encompass relationships wherein confidence is actually reposed in another by reason
of their social ties....
46
47
48
49
Thus, we need not decide the broader legal issue raised by the district court. We
affirm the directing of a verdict by the district court on the grounds that
insufficient evidence of a confidential relation was presented to warrant a jury
determination of this issue.
In instructing the jury on Count Thirteen for conversion of Reid's funds, the
district court referred only to the alleged check for work at Brunswick Naval
Air Station. Plaintiffs argue that the court should also have instructed the jury
on a claim for conversion of the check from Nickerson & O'Day. While the
complaint only mentions the Brunswick check, plaintiffs contend that the
reference in Count Thirteen to the "set[ting] off [of] all the monies in Plaintiff's
account at Depositors," sufficed to warrant an instruction on the Nickerson &
O'Day check as well as the Brunswick check.
52
We find that any error in the court's instructions was harmless. In Count
Twelve, plaintiffs also alleged the improper setting off of sums in Reid's
account against the loan balance. This claim was phrased in substantially the
same terms as the language in Count Thirteen that plaintiffs seek to construe as
extending to the handling of the Nickerson & O'Day check. The jury found for
defendant on Count Twelve, thereby signifying that it found no impropriety in
the handling of the funds in Reid's account at Depositors. The jury, however
instructed, could not have returned a contrary verdict on the substantially
identical issue in Count Thirteen.
The district court instructed the jury that Count Fifteen was a claim for the
intentional infliction of emotional distress on Mrs. Reid. Plaintiffs argue that
Count Fifteen is more properly construed as a claim for the negligent infliction
of emotional distress. Plaintiffs contend that the court, in effect, directed a
verdict on their negligence claim and that this ruling was improper.
55
We find, however, that there was no reversible error in the court's instructions,
regardless of the proper construction of the ambiguous language of Count
Fifteen. In Maine, "negligent infliction of emotional stress is not an
Moreover, we think there are strong indications that such a limitation would not
represent the Maine court's future, or even current, thinking on this matter.
First, we note that many courts have construed the "good faith" provision of
Sec. 1-208 as including an objective component. See, e.g., K.M.C. Co. v. Irving
Trust Co., 757 F.2d 752, 760-61 (6th Cir.1985). This construction was
supported by the views of Professor Gilmore, one of the drafters of the U.C.C.
See 2 G. Gilmore, Security Interests in Personal Property Sec. 43.4 at 1197
(1965). See also J. White and R. Summers, Uniform Commercial Code 1088
(2d ed.1980) ("The draftsmen apparently intended an objective standard.").
Moreover, as many commentators have shown, the difference between socalled "objective" and "subjective" standards is often minimal in practice. See,
e.g., J. White and R. Summers at 1088-90. Finally, we note the following
pronouncement of the Maine court, broadly paraphrasing Sec. 4-103 of the
U.C.C.: "[I]n fact the Uniform Commercial Code imposes a duty of ordinary
care and good faith on banks in their dealings with customers." C-K Enterprises
v. Depositors Trust Co., 438 A.2d 262, 264 (1981). The use of the sweeping
phrase, "in their dealings with customers," arguably extends the protection of
"ordinary care" in Maine beyond those bank transactions specifically covered in
Article 4
Indeed, as early as 1937, at least one court was of the view that the complexity
of modern financial arrangements was such as to warrant the finding of a
confidential relation between a bank and its customers under the appropriate
circumstances. See Stewart v. Phoenix National Bank, 49 Ariz. 34, 64 P.2d 101
(1937)